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Wednesday, June 6, 2012

Adding to a losing position

Among all the trading sins, none is venial as adding to a losing position for a better average price. On trading range days, adding-on may work eventually although a trader would end up trading way beyond his comfort level before he sees a price better than his average price. On many days, he may only get away with a scratch.

On trend days such as today, counter-trend traders are likely to get killed if they add on anytime the trade moves against them. For example, a trader may short b10 as a first attempt to reverse (which is profitable on many days), but when the trade moves against him, instead of letting the market stop him out, he may decide to move the stop way up and add on where he would be stopped out or on the next signal.

The psychological issue at hand is the desire to pick the exact high or low of the move to get the best possible price. This combined with a wrong sense of direction will destroy the trader's account rapidly.

The way to deal with this issue is to resolve to never trade reversals. A trader should always wait for the reversal to succeed and establish a successful trend in the opposite direction and enter on its first pullback. Unless a reversal is obvious, it is likely to fail.

On a day such as today, a trader looking to short would do much better if he waited for the short trend (b41-47) to establish and then enter on b50 than to short every bear bar on the way up from b1 trying to pick the exact turn.